When it comes to money, we live in constant tension; how do we save and plan for the future while also enjoying today? It’s a question most of us wrestle with every day.
Saving for the future is extremely important. We understand that. But it’s equally important that we can enjoy our lives in the process of working towards the future.
Because of that, there are many reasons why it can be a good idea to get a personal loan. When looking to get a loan, there are certain steps you can take to get your desired loan amount to ensure you borrow enough to meet your needs.
Before we get to that, let’s dig into what personal loans are, and why they are a good idea for some.
Most Common Reasons to Get a Personal Loan
Around the world, there are hundreds, if not thousands of different reasons that people apply for personal loans. Here are some of the most common.
1. Refinancing or Consolidating Debt
More than half of all Americans are struggling with credit card debt. Credit cards are easy to get and even easier to use. The problem is that they come with giant interest rates.
This can make paying them down very difficult. Many people take out personal loans with much lower interest rates to consolidate high-interest debts into one monthly payment.
2. Home Improvement
When it comes to borrowing money, one of the best uses for a personal loan is home improvement. Not only will you have a nicer home for your family to make memories in, but it will also improve the value of your home.
This will increase your equity and resale value, which can be a good investment. There are some improvements that don’t do much to add value, so it’s best to make worthwhile improvements when borrowing money.
3. Medical Bills
Nobody plans for them but at some point, you will be faced with them. Medical bills often arise from emergency situations. If you don’t pay them on time, they may be sent to the collections department, which is a terrible thing.
Many people are tempted to pay for them using a credit card, but the interest rate makes this a bad plan. If you don’t have the savings to cover medical bills, a personal loan is a better option.
4. Starting or Supporting Your Business
When you are starting a brand new business, it can be very hard to get financing. Banks and lenders want to see some form of business history before dishing out business or startup loans.
As a result, many new entrepreneurs take out a personal loan to get the startup capital they need to launch their projects. While this can be a great idea, it’s best to bootstrap as long as possible and prove your business model before borrowing money to support it.
5. Financing a Wedding, Vacation, or Move
There are certain life events that only come once or twice. As a result, they deserve to be the best and most memorable occasions.
Many couples, or even parents, take out a personal loan to finance a wedding. Some use the loan to pay for a once-in-a-lifetime honeymoon or family vacation.
Or maybe you get the opportunity to move across the country, or even internationally. Moving can be expensive, so a loan can be used to cover this one-time expense.
How Personal Loans Work
So you know you need a personal loan, but how do they work exactly? They are the most standard type of loan available.
Unlike a credit card or line of credit, where you can borrow at will, a personal loan is a lump sum of money you received at one time. Upon approval for your loan, the money will be deposited into your bank account, where you can spend it as you see fit.
Depending on your loan terms, you may start paying back the loan, plus interest, the following month or at a set date. You and your lender will have agreed on the length of your loans, such as 12 months, 24 months, or 60 months.
You will make the same payment each month until the loan is paid back in full. Depending on your terms, you may be allowed to pay the loan back early to save on interest. Some lenders charge an additional fee for this.
Personal loans will show up on your credit report, so making your payments on time is crucial to maintaining and building your credit score.
How to Get a Personal Loan
If your financial situation is relatively stable, it’s not hard to get a personal loan. To start, you’ll need to check out your credit score, which you can do for free.
If you don’t yet have any credit, getting a small personal loan can be a great way to start building your score. But without a high score, you won’t be able to get a large loan or a good interest rate.
Before officially applying for a loan, you can get pre-qualified. Basically, you can input your personal information and financial history to see if you will qualify, and if so, how much you might receive as well as the average interest rate that similar borrowers pay.
Getting prequalified results in a soft pull on your credit report, which has no negative effects. If you get prequalified, then you can search around for lenders that are likely to approve your loan and apply.
How to Get Your Desired Loan Amount?
When looking for a loan, you probably know how much you are looking to get. For some people, this could be between $20,000 and $50,000 depending on their goals. If you don’t know how much you’d like to borrow, then you probably aren’t ready to get a loan.
So how can you ensure that you get your desired loan amount? Preparation.
Take steps to improve your credit score months before applying for a personal loan. Make payments on time, check your report and correct any errors, and so forth.
Also, make sure you have sufficient work history. The more money you make, the more you can borrow. And the more stable your work history, the better. If you just started a new job in a brand new industry, lenders won’t be excited.
There are many specialty lenders that make it much easier to get personal loans. They often have easier application processes, lower interest rates, and offer high loan limits.
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Personal Loan Tips
When shopping around for a personal loan, it can help to check with your smaller local banks or credit unions. They typically have more options available regarding unsecured personal loans, especially for borrowers with low credit scores.
Also, if you have any other debts, such as a credit card, auto loan, or medical bill, try to pay them off before applying for a new loan. The less debt you have compared to your monthly income, the better.
Personal Loan Alternatives
Personal loans are good options for most people. However, depending on your current situation and your goals, there may be an even better option.
Home Equity Line of Credit
If you currently own your home or have a mortgage, you may be able to get a HELOC, or home equity line of credit. With a HELOC, you are basically borrowing money from yourself.
You have equity in your home, and the HELOC allows you to pull some of that out, spend it how you want, and pay it back. Because it’s a line of credit, you can use the money at will, typically over the course of 10 years.
At the end of your draw period, you will no longer be able to borrow and will have to make monthly payments until the full amount is paid back.
This is a great option for home improvement projects or even to help pay for your kid’s college tuition.
Delayed-Interest Credit Cards
There are certain situations where credit cards can work in your favor. Many institutions offer credit cards that do not require interest payments for 6 to 12 months, sometimes longer.
If you are planning to borrow a set amount of money, typically less than $5,000, and are confident you can pay back the loan before the interest kicks in, this can be a fast, easy option.
Make the Most of Your Money
Not all loans are bad. Mortgages keep people safe by providing a roof over their heads while also building equity and wealth.
Auto loans allow us to purchase vehicles, so we can get to work and make a living. And personal loans allow us to either enrich our lives today or to handle emergency situations.
If you are a responsible borrower, there’s no reason why you shouldn’t consider a personal loan. Especially if you can get your desired loan amount with the lowest possible interest rate.
Looking for more financial advice to help you live fully now while saving for the future? Check out our blog for more articles like this.